Exclusive: Suppliers question Tesla's goals for Model 3 output

Paul Lienert, Alexandria Sage

6 Min Read

DETROIT/SAN FRANCISCO (Reuters) - Tesla Motors Inc has surprised parts makers with plans to move up the launch of high-volume production of its Model 3 to 2018, two years earlier than planned - an acceleration that supplier executives and industry consultants said would be difficult to achieve and potentially costly.

In the past three months, Tesla (TSLA.O) has told suppliers the company was doubling its original production projections to 100,000 Model 3s in 2017 and 400,000 in 2018, several supplier industry executives familiar with the plans told Reuters.

Details on Model 3 production projections have not been reported previously, and Tesla did not break out target volumes for the Model 3.

Tesla has taken 373,000 orders for the Model 3 - which has a starting price of $35,000, about half its Model S - and has said it would begin customer deliveries in late 2017. But it has made no promises, and, on earlier models, customers waited months for delivery.

Citing “tremendous demand,” Chief Executive Elon Musk told analysts on an April call that the company planned to boost total production, including the existing Model S and Model X crossover, to 500,000 in 2018 - two years earlier than its original target and a 10-fold increase over the 50,000 vehicles it made in 2015.

Musk said Tesla told suppliers to prepare for Model 3 production tests in July 2017, a goal he acknowledged may be unrealistic for some. But he said the “aggressive” target was necessary to reach production goals.

“Now, will we actually be able to achieve volume production on July 1 next year? Of course not,” he told analysts.

”The reason is that even if 99 percent of the internally produced items and supplier items are available on July 1, we still cannot produce the car because you cannot produce a car that is missing 1 percent of its components,” he said.

Musk said the Model 3’s simpler design, new production hires and enthusiastic suppliers would help the company make its goals. He said Tesla would drop suppliers that could not meet deadlines and would bring more parts production in-house than traditional automakers typically do. He did not specify how much or which parts.

“It’s very important for us to have the ability to produce almost any part on the car at will because it alleviates risk with suppliers,” Musk told analysts.

Industry experts said Tesla’s new goals were extraordinary and raised doubts it could meet them. The handful of North American auto plants capable of building 500,000 vehicles a year are all run by automakers with decades of experience, they said.

Tesla continues to have delivery delays for its Model X SUV. Its Model S also missed delivery targets when launched.

SPEEDING UP ASSEMBLY

One complication is that Tesla has not finalized the Model 3 design and specifications, said automaking consultants and supply executives who asked not to be identified because Tesla prohibits them from disclosing contract details.

Musk has said the Model 3 design and engineering would be complete in June, 13 months ahead of the planned production startup.

Under ideal conditions, automakers have launched new assembly lines in 18 months, but they typically take two to three years after the first tooling and supply contracts are signed, several manufacturing consultants said.

“FCA already has the talent and the money, and the underlying machinery is already installed in the plant,” said one longtime supply sales executive. “They’re aiming to be up and running in 2018, so they have two years – and suppliers are wondering if they’ll make that deadline.”

Tesla says the Model 3 features 6,000 to 7,000 unique components, fewer than the typical automobile with a combustion engine and the Model S, which has more than 8,000 parts.

The company still is soliciting bids for parts and machinery, according to representatives from several of companies that have received them, as well as industry consultants who monitor such bids.

Automaking consultant Ron Harbour of Oliver Wyman said increasing production at the Fremont plant to 500,000 vehicles in 2018 would require more stamping, welding and assembly machinery that “could take up to 18 months to order and install.”

He said Musk’s plan to make parts in-house can minimize risk, but it also can be more expensive and distracting.

Tesla’s production push comes at a time of high demand for machinery and tooling created by a surge in product launches coming from established automakers, said a Detroit-based supplier sales executive.

Jeff Schuster of industry forecaster LMC Automotive said the goals were “implausible,” in part because Tesla’s battery factory in Reno, Nevada, was unfinished.

Aluminum, lithium and other materials - already in short supply - “could be another limiting factor,” said Sam Fiorani of AutoForecast Solutions.

Earlier this month two top manufacturing executives left the company. Last week, Tesla said it had hired Peter Hochholdinger, formerly of Volkswagen AG’s (VOWG_p.DE) Audi brand, as vice president of vehicle production.

Tesla may pay a premium for work to speed up the Model 3 production launch, supplier executives said. The company has increased its 2016 capital spending forecast by 50 percent to about $2.25 billion.

On Wednesday, Tesla announced it would sell up to $1.7 billion in new common shares, in part to pay for machinery and engineering for the Model 3.

“I’d be really surprised if he can launch production by next July,” said Frank Faga, a Detroit-based auto manufacturing consultant. “But this is a guy who says he’s going to Mars. Who am I to say he can’t do this?”